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Letters and Replies, Winter 2008–2009

To the Editor:

Raymond C. Niles’s article “Property Rights and the Crisis of the Electric Grid” (TOS, Summer 2008) provides an excellent examination of the events that led to the rolling blackouts in California. I have a question, however, regarding one aspect of those events. Niles writes: “As the market price of electricity in California exceeded the legal maximum, the power generators began shipping power to the surrounding states to take advantage of market prices.” What would have happened if California’s government, in an attempt to keep electricity in-state for its citizens, had prohibited its power generators from selling to surrounding states? Would blackouts still have resulted under such a ban on exports, or might some other problem have arisen?

Brian Tinker

Akron, Ohio

Raymond C. Niles replies:

A ban by California on electricity exportation would have had a detrimental effect on the supply of electricity in the state. But, for contrast, let us first consider the effect it would have had on electricity supplies in the less-regulated surrounding states.

A ban would have reduced electricity supplies and driven up prices in the surrounding states. However, blackouts would not have occurred in those states because those states imposed no price controls (until near the end of the crisis). Unhindered by price controls, electricity producers in those surrounding states could have charged the higher market prices necessary to profit from the sale of their good—giving them the means and incentive to produce more, and allowing customers to get the electricity they needed as long as they were willing to pay the higher market prices. Because they had not imposed price controls, the surrounding states would have weathered the shortage without suffering blackouts.

In California, however, a ban on power exports would have done nothing to quell the state’s rolling blackouts. Unlike the surrounding states, California did have price controls. Electricity producers could not profit in California when market prices exceeded the price caps; at that point, they would have lost money with every electron they sold. Accordingly, when the market prices did reach and then threatened to exceed the price caps, power producers in the state reduced their output in order to avoid sinking into debt. A ban on exports to other states would have done nothing to change the anti-profit market conditions in California, the conditions that left producers with no choice but to reduce the amount of electricity they sold in the state. Although not selling electricity to the surrounding states would have increased electric producers’ capacity to produce electricity to sell in state, it would have done nothing to increase their incentive to do so, and they still would have limited their output so as not to lose money. The blackouts would have continued unabated.

A ban in California on exporting might have resulted in an even more tumultuous situation on the West Coast. California typically exports much of its electricity in the winter, but it is a huge importer of electricity in the summer. By prohibiting its electricity producers from selling power to the surrounding states when they needed it, California would have been practically begging for retaliation from those states. Had the surrounding states enacted bans on exports to California, its citizens would not have gotten the electricity they needed in the summer, and America would have found itself in the midst of a de facto tariff war, with all of its destructive implications.

California could not have justified a ban on legal grounds; such a ban would have violated the constitutional provision that gives the federal government jurisdiction over interstate commerce. However, given the anti-generator atmosphere at the time, I would not have been surprised if California had flouted the Constitution and wielded force against its electricity producers in order to prevent them from exporting. California’s governor, treasurer, and legislature were actually threatening to deploy the National Guard in order to seize power plants. In such an atmosphere of extralegal thuggery, the Constitution might not have stayed California officials from further flaunting their ignorance and enforcing a ban on exports to other states. Fortunately, California’s rights violations did not go as far as they might have that time. As to the future, we will see.

About Raymond C. Niles

Raymond C. Niles manages an investment fund focused on the electric utility and related industries. Prior to initiating his fund, Mr. Niles was a senior electric utility analyst at Citigroup and Schroders. He has appeared on numerous industry and media forums, including the Edison Electric Institute, the NYMEX, the Wall Street Journal, Barron’s, CNBC, and ABC News. Mr. Niles holds an MBA from the Stern School of Business at New York University.

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